1.2 What Does Nonprofit Mean?

In discussing nonprofit organizations, it is important to recognize that “nonprofit” has been defined and redefined several times throughout its existence. Scholars, business people and the government often break the United States economy into sectors. The first sector is all private for-profit businesses, which includes the huge corporations that dominate the market (Gunn, 2004). The second sector is the government and all its subsidiary programs (Gunn, 2004). The third sector is inclusive of any number of nonprofit organizations; these are often called charities, volunteer, independent, non-governmental, civil society, etc. (O’Neil, 2002).

Lewis and Milano define nonprofit as an organization that does not intend to earn profits from its activities, has a State Certificate of Incorporation, board of directors and clear mission statement (1987). Setterberg and Schulman discuss nonprofits that have an annual budget of $500,000 or less and are tax-exempt; they also include the millions of unincorporated clubs and associations that operate in North America (1985). Brock and Banting claim nonprofits merely do the job that “governments no longer desire or are able to provide to citizens directly” (2001). Gunn states that the third sector is the part of the economy that “serves communities facing needs created by capital’s failure, neglect or flight” (Gunn, 2004). O’Neill defines nonprofit industry not by what it is, but rather by what it is not. Nonprofit organizations are groups that are not family, not business and not part of the government. (2002). Gassler takes a similar approach by defining nonprofits, both public and private, as all organizations that are not profit enterprises (1986). O’Neill then provides six criteria for nonprofits which stipulate that a nonprofit be a private, self-governing organization that is not part of the government and does not distribute its profits, is voluntary and of public benefit (2002).

For the purpose of this paper, nonprofit refers to the third sector of the United States economy. It is inclusive of incorporated businesses, unincorporated associations, trusts and foundations. I believe there are two components of nonprofit entities that are of utmost importance. First, the owners or board of the nonprofit, although allowed a reasonable salary, are not permitted to personally receive any funds in excess of expenditures. While some argue (Gaul and Borowski, 1993) that a profit by any name, such as surplus or excess, is still a profit, I believe there is a distinction beyond terminology. Surpluses or excesses are retained or reinvested in the company, to make capital improvements, for example. Since the surplus is not distributed to the individual owner(s), it is therefore not considered a profit.

The second component of nonprofits is the central mission to aid the public. As Gunn (2004) and Brock and Banting (2001) concur, nonprofits serve the public when the private sector and the government are unable to do so. Nonprofits are typically tied to the community they serve, whether that community is geographic, religious, occupational, cultural, etc. In addition to their mission statements to benefit the public, nonprofits also aid the public commons by improving the economic conditions of their communities. They build tangible and intangible assets, such as healthcare and education, which stay in the community and perpetuate development. Being grounded in a local community also obliges nonprofits to adopt sustainable operating practices, as their actions directly affect local residents. There are countless ways nonprofits can benefit the public, either directly in the mission statement or indirectly in the standard operating procedures. However, benefiting the public, not profiting from them, is of utmost importance for a nonprofit organization.